A.M. Best Completes Review of Non-Interactive Health Insurer Ratings; Reports More Upgrades Than Downgrades

Business Wire, Oct 22, 2007

OLDWICK, N.J. -- A.M. Best Co. recently completed its annual review of financial strength ratings (FSR) for health maintenance organizations (HMO). A.M. Best has upgraded the FSRs of 33 HMOs, downgraded the FSRs of 18 HMOs, affirmed the FSRs of 110 HMOs and assigned FSRs to nine HMOs.

These ratings are based solely upon public information and present the most informed view A.M. Best can offer, short of an insurer participating in the full interactive rating process. A.M. Best uses the same rating scale and definitions as it does for its long-term financial strength interactive ratings but applies a pd modifier to ensure the user is aware of the more limited information basis for the rating.

Over the past year, these HMOs had approximately one-half the amount of downgrades as upgrades. The majority of the companies are single state HMOs, which include Medicaid and Medicare insurers. Although the overall health insurance market continues to exhibit strong profitability and improved risk-based capitalization, a number of these HMOs were downgraded.

The FSR downgrades were due to weak risk-based capitalization, unfavorable operating performance, higher than average asset allocation to stocks, negative operating cash flows and product concentration, particularly in Medicare and Medicaid products. In a number of regional markets, local health plans experienced significant competitive pressures from Blue Cross Blue Shield (BCBS) plans and strong regional and national health insurance companies. Unfavorable operating performance primarily was driven by poor results in the commercial line of business. In many cases, the Medical loss ratio had spiked 100 basis points (bp) or higher to the high 80s or low 90s. Furthermore, for some health plans, the balance sheet was exposed to investment risks due to higher than average asset allocation of stocks and non-investment grade bonds. This resulted in a higher asset risk-based capital charge, which weaken the various HMOs' capital position. However, favorable changes to both Medicare and Medicaid reimbursements have resulted in significant revenue growth and concentration risks for a number of local HMOs. This concentration in either Medicare or Medicaid has hindered the various HMOs' ability to remain flexible in a market where reimbursements are driven by federal or state governments.

The FSR upgrades primarily were driven by a combination of considerable capital and surplus growth, return of revenues (ROR) 5.0% or higher, continuation of improving operating results and a medical loss ratio in the mid-80s. This enabled the healthcare organizations to report improvement in their risk-based capitalization.

The FSR affirmations were a result of favorable performance without operations and risk-based capitalization levels that deviated from outside the norms for current rating levels.

A.M. Best expects that the sustainability of future earnings for any health plan will be challenged by a number of factors. These include the increasing competition from national and regional health insurance companies, continuation of moderating medical trends and reliance on either Medicare or Medicaid for growth.

Founded in 1899, A.M. Best Company is a global full-service credit rating organization dedicated to serving the financial and health care service industries, including insurance companies, banks, hospitals and health care system providers. For more information, visit www.ambest.com.